Monthly Archive for May, 2009

You know the ones--what's your ethnicity? How many years of schooling do you have? Are you involved in a lawsuit? How old are you? What's your marital status? Why can't lenders mind their own business? Aren't there laws about discrimination? Yes, some of these routine questions on every loan application (often referred to as a Fannie Mae 1003) seem nosy, rude, and pointless. But there's a good reason for most of them.

Why Should My Lender Care if I'm Involved in a Lawsuit?
Because if you are the defendant, there's a chance you could lose. That won't disqualify you from getting a loan; it will trigger a request for more information--for example a letter from your attorney or some official court documents. There is a difference between a suit that could result in you paying someone $1,000 a month out of your own pocket for life and a $5,000 claim that your insurance will take care of.

Can My Lender Legally Ask What Race I Am?
Yes, and it's not for the reason you think. Data from every loan application is analyzed by the government and it's actually to protect minorities. If a certain lender seems to be charging minoritiy borrowers higher rates, declining their applications more often than white applicants, or treating them differently in any discernable way, it does trigger Fair Housing inquiries or even investigations. For example, agents may walk into a lender's office and see how diffferent races are treated--from who gets offered a cup of coffee and a handshake to who gets the fastest approval and the lowest rate. You don't have to answer the question. The form states, "If you do ot wish to furnish the above information, please check the box below.But then your loan officer will have to make a reasonable effort to guess and complete the form anyway. The form also states the following: "if you choose not to furnish it, under Federal regulations this Lender is required to note race and sex on the basis of visual observation or surname." The intention behind gathering that information is in fact to protect borrowers, not make discrimination easier for lenders. Besides, discrimination is a stupid business practice when it's so easy for people of all races to compare mortgage rates online while divulging almost no personal information.

Marital Status? Why?
States have different laws pertaining to the division of property interest between married couples. For example, in a community property state, it is assumed that property purchased by one partner is also legally the property of the other--unless the other partner okays the deal by signing off with a "quit claim" and allowing the other to take possession as his or her own separate property. So a lender needs to know your status to make sure that title is taken correctly and the correct forms comepleted. In addition, legal separations or divorces trigger additional requests for information, such as child support agreements and property division that may affect your ability to pay your mortgage.

Age? Education? C'mon, That's Crazy!
Not necessarily. Of course you can't discriminate against a 90-year-old guy who wants a 30 year mortgage. That's good. But you do need to know that the buyer is old enough to legally execute a real estate contract. In most states that age is 18. Other lenders use it as a check for fraud--your age should match your credit report, for one thing.

And education? Nope, they really aren't more likely to give you a loan if you have a college degree than if you don't if everything else is okay. Where it can help is with certain programs, FHA for one, that will lend more if you have what they call "mitigating circumstances." So for example the fact that you just got out of medical school will somewhat mitigate the fact that you haven't been employed long or that you aren't real high up the income food chain yet. So, answering the question about education won't hurt you and it could help you. Note: for those who haven't got the fancy degree, there are other mitigating circumstances for you too--like the fact that you were smart enough NOT to accept all those credit cards they hand out to college students like candy and that you demonstrated that you were smart enough to avoid excessive debt!).

So, yes, a lot of the mortgage loan process seeems silly. And in fact, a lot of it IS silly. But often there is a method to the madness and most of the time it is designed to work in your favor.

Lease options, otherwise called rent-to-own transactions, can help you buy a home you want when you can't make the purchase right away because your credit isn't up to snuff, you need more time on your job to get your mortgage, or you're still saving your down payment. They can also empty your wallet and make you homeless! So enter these transactions carefully.

Why would a seller consent to a lease option? Well, right now there are several reasons. In a slow market, many find that offering a lease option makes their home more competitive. But in addition, there are some sellers who are just evil and have discovered a way to take advantage of people. Some of these creeps "sell" their homes several times a year!

It is critical that your lease option specify what every cent you give your landlord is for. Typically, there is an option fee. You pay this for the privilige of being allowed to purchase the home at an agreed-on price within a specified time. Sometimes, this fee is applied towards the down payment if you exercise your option. But only if that is specified in your agreement. This is important because a lender may not give you credit for what you thought was a down payment when you try to complete your purchase.

Better never than late: Some landlords (the ones who like to sell their homes over and over) have very tough restrictions--and violating even one of them even once can get you evicted and your money lost! Even one late rent payment can cost you everything. So if you aren't absolutely sure that you can make every payment on time or meet whatever condition the landlord / seller imposes (a bad guy might kick you out for having a goldfish if there was a "no pets" clause in the agreement), then just don't go there.

Dirty Tricks :

This is what bad guys love to do to ignorant buyers:

1. Demand a large up-front option payment (non-refundable for any reason), and a large monthly premium (ditto).
2. Include the right to cancel the deal if the payment is received in as little as ten days late!
3. Demand payments in person, then make themselves hard to find.
4. Evict!
5. Resell!

Smart Buyers:

1. Have a real estate lawyer draw up or at least look your documents over before you sign them. Worth a few hundred dollars every time. There are things you must do at the start of a lease-option if the lender is to recognize your equity an the time of purchase.
2. Have a loan officer look over your finances, tell you what you need to do to qualify for financing, and make sure you'll be capable of exercising the option by the time it expires.
3. Never turn down a free or low cost option.
4. Take care fo the property. If you have a "triple-net" lease, make sure the taxes, home owner's dues, insurance, and other expenses are paid--because typically those will be your responsibility. One missed payment and you're out.
5. Take care of the property. Neglect it and you investment value drops or you may be evicted and you lose your money.
6. Never, never, never let an option expire without getting the property appraised. What you was kind of pricy in the beginning might be a real bargain near the end of the option.
7. Make sure the documents get recorded as public records. You don't want your seller loading up your property with loans you don't know about.

When you're finally ready to make that home truly yours, find a loan expert who has the experience to get you the best loan, present your application properly to underwriters, and close the deal with minimal hassle.

What does it mean when a lender claims he or she is "absorbing your mortgage costs"? Or what about an advertisement offering "No Cost" mortgages? Of course, there are costs associated with getting a home loan--a lot of costs. And the lender has to disclose them to you on a form called a Good Faith Estimate (GFE). So, when a lender claims it is absorbing your costs or "giving" you a "no-cost" loan, you will see a bunch of fees on your GFE. Then, the form shows all these fees being reversed or designated "paid by lender."

If you really think the lender is absorbing your fees out of the goodness of its heart (maybe it's run by the Tooth Fairy or something), then I have some really nice abandoned half-built condos in Vegas I'd like to sell you. "Par" is mortgage industry term for the rate you'd pay if everyone involved in the entire transaction worked for free--there would be just the cost of the money, which changes with financial markets just like stock prices do. And you can get that rate if you want--but you are going to have to pay the costs of originating the mortgage--appraisal, title, lender, etc. fees. And you can get a lower rate than "par" if you want--by paying still more--called "discount" fees or points. But if you don't want to come in and pay those fees out of pocket, you have two choices.

You don't have to empty your pockets to pay your costs when you close your loan. You can finance them (roll them into the loan amount), or you can opt for a no-cost loan. A recent survey indicated that 85% of borrowers refinancing chose not to pay their fees put of pocket--they either financed them or went with a no-cost option. So it's a pretty popular choice. You will pay a higher than the average market par rate if you pay no fees. That's just business and is not evil unless you think everyone should work for free.

However, this loan may not be in your best interest. Typically, "no-cost" mortgages, with their higher rates, will cost the borrower more in the long run--not the best deal if you are 30 years old and are imagining grandkids visiting you in this house someday. So if you plan to keep that home and mortgage more than a few years, you might want to pay the fees (and maybe even a discount point or two, or consider a 15 year mortgage) and spend less on interest over the life of the loan. Mortgage calculators abound and are very helpful in putting this concept into actual payments, and amortization schedules show you how your loan will be paid over time.

The easiest way to compare loans is to ask a few lenders for three rate quotes on the same product. Get one quote with all the fees (excluding property taxes and insurance, which you have to pay whether you have a mortgage or not). Then get a second quote on a "no-cost deal." Finally, see what your payment would look like if you roll the costs into the mortgage (you only have this option if you are refinancing and there is enough equity in the property). Run the numbers through a mortgage calculator and see how long it would take for the money you saved upfront to be paid back in higher interest charges. And if you have plans for that money you don't pay upfront (like investing in CD rates paying 3% or whatever) don't forget to include that in your mortgage decision.

Finally, if you aren't sure how long you will be in your home, but the rate on a "no-cost" loan is lower than the rate you're paying now--and you won't be paying any fees--just pretend you're a Nike athlete and "just do it." That decision is a no-brainer.

I created a previous post called "Second Mortgage Holder Jerking You Around?" that addressed the difficulties homeowners were having getting mortgages modified or short sales approved, despite the intentions of their first mortgage holders.That's because no matter what was done to save the homeowner (and 50% of problem mortgages have second liens attached on there too) from foreclosure, the second lien holders were going to be screwed and so there was no reason for them to cooperate. And there was always some small chance that they might recover something if they dug in their heels. That's changed.

An update to the Making Home Affordable program addresses this difficulty. The Second Lien Program was designed to help those whose first mortgages could be saved with cooperation from the second lien holder. The updated program includes a lot of complicated formulas and carrots and sticks??designed to entice or force the second lender to cooperate, force the first lender to take a proportionate share of the losses, and minimize the risk / loss to taxpayers. It includes but isn't limited to the following:

• Shared Efforts with Lenders to Reduce Second Mortgage Payments
• Pay-for-Success Incentives for Servicers, Investors and Borrowers
• Payment Schedule for Extinguishing Second Mortgages
• Automatic Modification of a Second Lien When a First Lien is Modified
• Second mortgage holders will share the costs of reducing interest rates and payments with the first mortgage holders.
• The term (years remaining) on the second mortgage will be stretched out to equal that of the modified first mortgage.

While no one is crowing "mission accomplished" just yet, there are early signs that these updates are accomplishing their goals. Since the launch of Making Home Affordable, more than one million Americans have now refinanced, due to historically low interest rates, and thousands of underwater borrowers have refinanced under the Home Affordable Refinance Program. To see if you qualify, try www.makinghomeaffordable.com and answer a few simple questions. But if you don't need government help, get it yourself by running numbers through loan calculators and checking rates and programs right here. There are many good loan pros ready to help you DIYers.

And while it seems only expected that the taxpayers will ultimately take a hit it this program, that aint necessarily true. During the Great Depression, the government implemented an emergency measure to keep people in their homes. It was called the Home Owners' Loan Corporation. Interestingly, after all the bailing out, HOLC managed to turn a profit in the end. So today's efforts may in fact turn a profit for taxpayers as well.

In today's economic turmoil, people are changing jobs and residences faster than NASCAR crews change tires. So how does that affect your ability to get a new home once you've found that new job? It depends.
The standard for most lenders has traditionally been requiring a two-year work history. Not necessarily with the same company but in the same industry. However two year work histories can look very different--Ms. Mature took a part time internship in college, graduated and was given a full-time job with her company. Her income increased steadily. She took a better-paying job with a different company in the same industry (which happens to be Internet marketing, a booming field). So the fact that she's only been in her field for a year and a half full-time and at her new job for 3 months probably won't hinder her chances at getting that mortgage.

Now, let's take a look at her "fun-loving" roommate from college. This woman also worked while getting through college--delivering pizza and barely graduating. She continued to deliver pizza for another six months until landing a job in office supply sales. After a few months, she quit that job and took a new one as a receptionist. She has a few strikes against her--first, her work history is spotty because she quits her job every few months. Second, the new jobs don't offer additional opportunity or more money. Third, even though she has a college degree, her choice of employment looks more like a job happing spree than a career path. Party Girl looks less responsible, more likely to find herself unemployed, and less likely to take care of the business of owning a home.

FHA doesn't have a specific time requirement for your job or career at all. But again, if it's your first job and you've been there three weeks you will need some really good qualifications--like a medical degree perhaps. FHA also considers your savings habits, credit, and other factors though, so employment is not the hard-and-fast criterion that it is with many other lenders.

And most underwriters also look at the industry you work in (flourishing or failing?) and even the actual company (so you probably don't want to go to work for AIG right about now).

This looks like an IRS form, doesn't it? But look closer. It's a solicitation from a company (that doesn't even provide its name or address) trying to get you to sign on with a dubious mortgage "help" service. Don't even think of signing up with a company that would resort to such tactics. Especially to ...